Legislature faces another struggle over long-term budget plan

Legislative Finance Director David Teal testifies before the Senate Finance Committee in April 2017. Teal estimates Gov. Walker’s budget includes a $672 million gap for the coming year, even with a draw from permanent fund earnings. (Photo by Skip Gray/360 North)

The Legislature is faced with the same dilemma it’s had for the past three years: how to pay for the state budget when oil and gas revenue can no longer cover the costs. The biggest focus is on a plan that would draw from Alaska Permanent Fund earnings.

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The House and Senate both passed versions of legislation to draw from permanent fund earnings last year. While they didn’t iron out their differences over Senate Bill 26, rising oil prices and production have shrunk the gap between what the state spends and what it brings in.

But both chambers have taken positions that will make it difficult to pass a combined plan this year. The Senate majority wants a permanent fund draw, and would then wait to see if more changes will be needed in the future. The House wants to balance the budget in the next couple of years, even if it takes a new tax on income or oil and gas production.

“We need more revenue. I mean, we need to balance our income and our expenses,” Homer Republican Rep. Paul Seaton, a member of the mostly Democratic House majority, said.

Seaton is concerned that permanent fund dividends will shrink further without a broad-based tax like a tax on income, as well as higher oil and gas taxes.

“For people to have any security that there is a permanent fund dividend, when you start taking money out of the earnings reserve of the permanent fund, they need some security in that (dividend amount), and knowing what that’s going to be,” Seaton said.

Soldotna Republican Sen. Peter Micciche said the House majority has concentrated on the potential downsides of budget projections, in order to argue for new taxes. He said the Senate is more optimistic.

“We do not want to overcapitalize with taxes today,” Micciche said. “There’s a very good chance we’re not going to need them. And had we passed one three or four years ago, we would likely be overcapitalized today by a sum greater than a couple of hundred million dollars.”

Micciche said the two chambers should agree on where they have common ground – that is, drawing money from permanent fund earnings.

“If you look at what we want to do on discipline regarding the growth of the cost of this government – at inflation or lower – into the future, the reality of it is the fund grows much faster,” Micciche said. “And within a relatively short time, in perpetuity you would never have the need of a broad-based tax in the state of Alaska. I think that’s a worthwhile goal.”

One factor that could keep the two sides apart is the challenge in defining exactly what the size of the deficit is.

Legislative Finance Division director David Teal, a nonpartisan expert on the budget, said Gov. Bill Walker proposed a budget with a projected gap of $672 million between spending and oil royalties and taxes – if the Legislature passed a permanent fund earnings draw.

Micciche said there are a few factors that would drive the number down, including rising oil royalties.

Teal said it could benefit the Legislature to agree on the scope of the budget hole they’re trying to close.

“You want to avoid the situation that we had years ago, when the House had a revenue forecast, the Senate had a revenue forecast and the governor had a revenue forecast,” Teal said. “And when you’re in that situation, and the constitution requires a balanced budget, what are you balancing to?”

The House and Senate haven’t agreed on how much money they need to raise. In addition, they have different ideas on how large permanent fund dividends should be – the House has proposed $1,250, while the Senate proposed $1,000. And there also are differences on how large of a draw the permanent fund earnings can sustain.

Teal said agreeing on goals can help frame the discussion.

“Until people can agree on a set of outcomes that are acceptable to them, you’re going to have people differing on their opinion of whether an action fixes the problem,” Teal said.

And looming over all of this is an election that will determine the governor, half of the 20 senators and all 40 House members.

Lawmakers acknowledge that without a plan this year, the Legislature could make an unplanned draw on fund earnings to close the budget gap.